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Breaking down barriers to U.S.-Soviet trade with Soviet market access for small and medium size U.S. companies.

There is no doubt that many individuals, firms, enterprises, institutions, and governments have optimistic hopes and desires for expanding trade with all nations and, in particular, with the United States and the Soviet Union. Indeed, a growing trade relationship based on mutual respect and understanding confers benefits beyond a single transaction; the political, economic, social, cultural, scientific, and human relationships are enhanced as well. But past and recent history indicates that good intentions are often confounded by narrow protectionist influences and insulated economic structures that entangle the natural progression of trade expansion.

The United States represents the world's largest homogeneous market. With a population of almost 250 million and a gross national product of $4.5 trillion, it is also the most lucrative market in the world. It is not surprising, therefore, that the United States is the envy and target of many enterprising foreign exporters. Yet, there remain many barriers to the game of international trade, and every nation arms itself with defensive mechanisms to protect its own market. The United States is no exception. Protectionism in the United States manifests itself through the powers of special interest groups and industries. These groups and industries use the combination of political pressures and domestic and international laws to defend themselves from unfair foreign competition. Such laws provide defense mechanisms for industries suffering "injury" from a sudden surge in imports. In other cases, groups are affected by "dumping" from overseas at less than fair market value in an effort to achieve market penetration. This practice causes disruption of orderly competition, especially in cases where domestic production costs are higher than the export selling price.

Another practice causing concern is government subsidization of a particular industry. Subsidies impart an unfair advantage over an industry in an economy where the same sector is not subsidized. While these defensive mechanisms have worked to rectify unfair trade practices, as with any overzealous policy, law, regulation, or bureaucracy, they can also be abused to overprotect an industry or group of individuals to the detriment of all.

Through the years, the Soviet Union has been subject to various trade remedy laws. These include the provisions in the current trade bill in Congress adversely impacting non-market economies and the recent administrative actions that have been applied against the USSR. Specifically, in the area of textiles, in 1987 an embargo was placed by the U.S. Department of Commerce on imports of print cloth and sheeting from the USSR after its volume increased dramatically. It is interesting to note that the Soviet Union was able to defend its position in the sense that a former U.S. Department of Commerce official was retained by both the USSR and the principal importer to advise and offer guidance in bilateral discussions between governments regarding the embargo. Access to the United States administrative process through retainer arrangements is in full accordance with U.S. law.

The U.S. textile and apparel industry is the most highly protected industry sector in the United States with tariffs averaging over 18 percent, five times greater than tariffs on all other dutiable products. Additionally, there are more than 1,300 quotas covering textile and apparel products from more than 40 different countries. The authority for the United States textile quota program falls under the Multi-fiber Arrangement (MFA), which was negotiated under the auspices of the General Agreement of Tariffs and Trade (GATT), but represents a strict deviation from GATT free trade principles. Moreover, under Section 204 of the Agricultural Act of 1956, the United States government has the authority to take unilateral action against import surges from any supplier. Action taken under Section 204 is usually stricter and results in much tighter quotas. The Soviet Union, a party to neither GATT nor MFA, will continue to face harsher unilateral action by the United States toward its textile and apparel exports under Section 204 provisions.

On the other side of the equation, United States suppliers entering the Soviet market are faced with subtle protectionist tendencies. With the Soviet inconvertible currency, hard currency must be allocated by industry or ministry for purchases of Western goods, leaving a U.S. supplier at the bottom of the list unless there is a special priority for his particular product, spare part, machinery, or technology. While availability of credits from the West could partially mitigate this situation, a U.S. supplier, despite apparent quality advantages, is still not on the same level as a Soviet enterprise selling to another enterprise, purchasing supplies from Eastern Europe, or from more reliable Western European trading partners.

Even more striking is the competitive passivity that has existed in Soviet exports. Soviet enterprises unable to reach out and comprehend world market conditions and without incentive to earn hard currency for their own account were placed in a semiconscious economic slumber which is only now being addressed.

Furthermore, denying importers and purchasers access to factories where decisions might be made locally has further insulated the possibilities for redesigning products, modernizing plants, and adapting to market conditions. In this context, the role of U.S. importers, retailers, and subcontractors should not be minimized as a means to growth. These U.S. firms, mostly medium and small in size, have assisted immeasurably in developing exports in many other parts of the world in every product line imaginable. These products include U.S. imports of canned ham and boring machines from Poland; glassware and leather goods from Rumania; automobile parts and citrus from Brazil; medical instruments and pharmaceuticals from Hungary; footwear and beer from Mexico; clocks and steel from Yugoslavia; porcelain and jewelry from the People's Republic of China- wine and meat from Australia; textile and apparel from over 30 developing nations; mining equipment; machine tools; electronics; chemicals; and metals. If these same firms were able to do business with the Soviet Union, they could not only bolster their export potential, but their domestic potential as well.

Instead of placing too much emphasis on a handful of large projects exemplifying national pride and massive achievement, it may be more prudent and beneficial to proceed on a variety of smaller ventures and business transactions that have a greater chance of success and, in the aggregate, would be more beneficial to the economy. An old Russian proverb states, "The quieter we travel, the further we will get." Certainly with regard to political, domestic, bureaucratic, and trade law hurdles, a gradual approach would have inherent advantages if we, as businessmen and managers, were clear and persistent in our long-term objectives.

However, long-term objectives must be implemented with immediate steps to change attitudes and business practices that have long been ingrained and, therefore, will take time to rectify. Examples of insular Soviet attitudes are "it is more secure to do everything ourselves" and "we have done without butter before." The point is proven further with such practices as relinquishing foreign trade to a corps of elite and ignoring corruptive government/business conflicts of interest. Consider, for example, the following operational behavior prevalent in U.S.Soviet trade:

U.S. firms frequently relegate responsibility for Soviet trade to European affiliates or distributors, thereby losing opportunities for direct contact and the benefits of direct exchanges. This often leads to distorted country of origin trade information. This lack of direct contact is especially true for medium and small size firms. The Soviet foreign trading organizations, with restricted authority to reach out, are comfortable dealing with middlemen and intermediaries who serve a useful function, but who are sometimes of questionable repute. This practice exacerbates the lack of business confidence and creates an aura of mystery and intrigue. A Midwestern automotive parts supplier, Dayco Corporation, was convinced by an intermediary that a contract had been concluded only to find out later, having already paid a commission, that none was concluded.

Rather than relying on an incentive system, a Soviet practice of Petty gift and favor giving, combined with bureaucratic privileges and allowances to government officials, is difficult for outsiders to understand. This leads to subtle corruption that can be frustrating to businessmen.

Many Soviet trade officials believe that large firms constitute the "ruling circles" of the U.S. and, consequently, rely too heavily on their influence in changing U.S. trade policy vis-avis the Soviet Union. Currently, there is a void created by attrition of the corporate moguls who were directly involved in U.S.-Soviet trade during the detente period. These leaders, who included Brooks McCormick of International Harvester, Stanford Smith of International Paper, and Reginald Jones of GE, were a symbol of progress in U.S.-Soviet trade. However, beyond their individual projects with the Soviets, they have not further promoted trade between the two countries. The new breed of corporate leaders is preoccupied by problems and opportunities elsewhere.

To bid on contracts, U.S. firms invest heavily in proposal preparation to meet Soviet standards. This requires detailed design, engineering, equipment specifications, and pricing breakdowns. Since the Soviets usually do not pay up front for proposal preparation and bidders are kept in the dark, many firms are vulnerable to "whipsawing" and compromising technology and know-how. In one case involving International Paper in the late 1970s, a $2.5 billion integrated plant proposal was requested by the Soviets requiring tens of thousands of manhours to prepare. After more than three years of meetings, delegation visits, and toasts to everlasting friendship, the project was whittled down to a $300,000 technology agreement and finally rejected.

The Soviets fear the United States is an unreliable supplier because of policy interference, such as inconsistencies in export control regulations, and because of experiences of offspec, beyond shelf-life and inferior quality deliveries. The latter can be attributed to overly aggressive bidding, one-shot deals, and the practice of purchasing without technical assistance and start-up provisions. In another case in the 1970s, a U.S. chemical engineering firm won a contract by underbidding its nearest competitor by 30 percent only to find itself in financial difficulty, with the consequent inability to meet deadlines and performance requirements.

The absence of a mechanism to facilitate the business interest of small and medium size firms wishing to import or export with the USSR is sorely missing. As history has demonstrated, a centralized system of purchasing and selling for an entire super economy does not meet access needs. Furthermore, U.S. associations or binational councils, while serving a useful purpose in promoting trade relations and public relations, are not equipped to nor should they undertake the task of facilitating trade transactions between the U.S. business community and Soviet organizations.

In this regard, there have been alleged charges of corruption; in 1987, a Deputy Minister of Foreign Trade responsible for trade with the United States, Canada, and Japan was convicted on charges of corruption. Instead, it is the primary responsibility of Soviet authorities to establish a mechanism or structure to facilitate and expedite business with small and medium size firms. This responsibility must include proper authority to access enterprises, factories, purchasing, and selling entities without bureaucratic encumbrances or favoritism.

While a timetable has been established for the decentralization of the Soviet domestic economy, decentralization of foreign trade has only begun to impact 60 percent of selected industries and ministries since January 1, 1988. When asked if the newly envisioned Soviet associations and collective enterprises will eventually be able to deal directly in foreign trade, Mr. Abel Aganbegyan, the chief architect of "perestroika," responded, "in two or three years but only through middlemen." Aganbegyan did not elaborate as to whether the middlemen would be the Ministry of Foreign Trade, the USSR Chamber of Commerce, newly created state or private trading companies, or security agencies.

Nevertheless, beyond encouraging the most direct access for business at all levels, there are steps that both sides can begin to undertake which would establish a better working relationship and may encourage more participation by small and medium size firms. These include the following:

Encourage liberalized joint venture regulations and expand their application to service industries, thereby improving trade facilitation and broad interest. Examples of service industries include banking, accounting, retailing, advertising, market research, customs brokers, freight forwarders, office equipment, and business communications. Most joint ventures now under consideration are with large U.S. firms seeking improved tax and tariff treatment, operating in foreign trade zones, off-shore assembly operations, and situations reducing product liability as objectives. Soviet organizations, on the other hand, are seeking technology, capital, and know-how in selected industry sectors with hard currency export potential or planned economy priority.

Improve hospitality accorded Western businessmen which currently involves exorbitant fees for hotels, meals, and business services. Consideration should be given to a special lower business class service. In terms of developing trade, it would pay for itself and attract more small and medium size firms that are more cost conscious. Many smaller firms are willing to explore the Soviet market but can only devote limited time-perhaps one or two trips-to determine if there is a concrete basis for business. This means the Soviet Union must not only be hospitable in a limited time frame, but should also establish a special structure to ensure easy access to trade officials, institutes, and enterprises. This could facilitate efficient scheduling of appointments, travel arrangements, plant visits, trial runs, and the like. A frustrated businessman seldom returns to be intimidated only large, project-oriented firms, having staff commitment and possessing resources allowing for greater patience and endurance, can afford to do so.

End bureaucratic encumbrances such as archaic customs procedures, a voucher system to pay for services, and complicated visa procedures. Specifically, business firms carrying out negotiations for accredited business status should be granted multiple entry visas more often than the present practice which is now limited to firms with offices in Moscow. Establish quick, efficient audio and visual business communications linking all major cities in the U.S. and USSR. A joint communications satellite project could be explored for this purpose. Organize a joint U.S.-Soviet university intern program for RussianEnglish business and language studies whereby students would be available as interns for businessmen during discussions, trade exhibitions, and visits. These same students would provide a cadre of experts for firms and enterprises to employ as relations and business develop. Redefine the role of the binational U.S.-USSR Trade and Economic Council as either a trade promoter or trade facilitator. Allegations have been made by the Heritage Foundation that the Council has been involved in lobbying activities and that there is apparent conflict of interest in its trade facilitation functions.

In essence, the manner in which we promote U.S.-Soviet trade must be placed on a high level of professionalism, honesty, integrity, and openness on both sides, enabling participants involved to be proud of their accomplishments. Firms of any size expect such behavior at home and should extend this in their relationship with the Soviet Union. It should be noted that small and medium size firms are less interested in promotion or lobbying but do have an overwhelming need for fair and equal trade facilitation and access into the Soviet market. This is fundamentally a Soviet international trade policy decision.

Whatever U.S.-Soviet trade problems existed in the past, the fact that there is now a new Soviet approach with an objective toward solving fundamental problems is invigorating. Restructuring foreign trade will go a long way toward solving these problems and will help alleviate other subtle forms of protectionism on both sides. Access to Soviet export/import markets would surely be viewed as a move towards a schedule of concessions necessary for the Soviet Union to become a GATT member. N
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Title Annotation:Soviet-American Joint Ventures
Author:Milosh, Eugene J.
Publication:Business Perspectives
Date:Sep 22, 1989
Previous Article:Penetrating the Soviet market.
Next Article:Becoming partners with the Russians.

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